Mid Term Review

After the government imposed a $0.20 per gallon tax on gasoline, the price of a gallon of gasoline increased from $1.00 to $1.15. Which of the following statements is true?

• Consumers bear the entire burden of the tax, since producers can pass the tax along to consumers.

  
  

• Consumers and producers share the tax burden equally.

  
  

• Consumers bear most, but not all, of the tax burden.

  
  

• Producers bear the entire burden of the tax, since the tax was levied on producers, not consumers.

  
  

• There is no tax burden, since gasoline is a normal good.

  
  

If the market price is $10, how many widgets should this profit-maximizing firm produce?

• $3000

• $6000

• $12000

• $16000

• $21000

Which of the following is true of both monopolistically competitive and perfectly competitive firms in long-run equilibrium?

• Marginal revenue equals average total cost.

  
  

• Marginal cost equals average total cost.

  
  

• Price equals average total cost.

  
  

• Price is greater than marginal cost.

  
  

• Production occurs at minimum average total cost.

  
  

In which of the following situations is a good NOT scarce?

• Consumer give up nothing to obtain more of the good.

  
  

• Consumer can purchase as much of the good as they want at its current market price.

  
  

• Large quantities of the good are available in the marketplace.

  
  

• There is a surplus of the good at some positive price.

  
  

• There is a shortage of the good at some positive price.

  
  

According to the table above, which shows the costs of production for a firm, the average total cost of producing 3 units of output is

• 5.00

  
  

  
  

• 11.67

  
  

• 13.33

  
  

• 15.00

  
  

• 20.00

  
  

If accounting profit is greater than zero for a firm in a competitive industry, then which of the following must be true?

• The firm has no fixed cost.

  
  

• The firm has positive economic profit.

  
  

• The firm’s total revenue exceeds its explicit cost.

  
  

• The firm’s economic profit exceeds its opportunity cost.

  
  

• New firms will enter the industry in the long run.

  
  

Answer explanation

Incorrect. New firms will enter the industry in the long run if existing firms are earning positive economic profits, not positive accounting profits.

Raheem is currently working as a financial analyst earning $75,000 a year and is considering quitting his current job to start an art gallery. The estimated annual revenue from the art gallery is $175,000. The annual cost of labor, advertising, and acquiring the art inventory is $125,000. What are Raheem’s accounting and economic profits if he opens the art gallery?

• Accounting profit is –$25,000, and economic profit is $50,000.

• Accounting profit is $100,000, and economic profit is $50,000.

• Accounting profit is $50,000, and economic profit is –$25,000.

• Accounting profit is $100,000, and economic profit is –$25,000.

• Accounting profit is $50,000, and economic profit is $100,000.

Answer explanation

Accounting profit is total revenue minus explicit cost. Raheem’s accounting profit is $175,000-$125,000=$50,000. Economic profit is total revenue minus the sum of explicit and implicit costs. Raheem’s economic profit is $175,000-($125,000+$75,000)=-$25,000.

The additional satisfaction received from consuming an additional unit of a good is called the

• marginal utility

  
  

• marginal product

  
  

• average product

  
  

• average utility

  
  

• total utility

  
  

As output of a firm increases, the difference between the firm’s average total cost and its average variable cost gets smaller because the firm’s

• total cost is increasing

  
  

• marginal cost is increasing

  
  

• average fixed cost is decreasing

  
  

• marginal product of labor is decreasing

  
  

• long-run average total cost is decreasing

  
  

A decrease in the demand for antique lanterns, a normal good, would be caused by which of the following?

• An increase in consumers’ incomes

  
  

• An increase in the price of antique lanterns

  
  

• An increase in the expected price of antique lanterns in the future

  
  

• An increase in the price of electric lanterns, a substitute good

  
  

• An increase in the price of lamp oil, a complementary good